Utility

Utility is a term introduced by Daniel Bernoulli (Swiss mathematician and physicist, 1700 - 1782) referring to the total satisfaction received from consuming a good or service.

The economic utility of a good or service is important to understand because it will directly influence the demand, and therefore price, of that good or service.

A consumer's utility is hard to measure, however, but it can be determined indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility.

Economists operate under the assumption that all utilities can be measured as a hard number.

To help with this quantitative measurement of satisfaction, the designation of a util was created to represent the amount of psychological satisfaction a specific good or service generates, for a subset of people in various situations.

If, for example, an individual judges that a piece of ham will yield 20 utils and that a piece of cheese will yield 25 utils, that individual will know that consuming the cheese will be more satisfying.

For the producers of ham and cheese, knowing that the average piece of cheese will yield 5 additional utils will help them price cheese slightly higher than ham.

Additionally, utils can decrease as the number of products or services as consumption increases.

The first piece of ham may yield 20 utils, but as more ham is consumed, the utils may decrease as people become full.

Therefore, consumers can understand how to maximize their utility by allocating their money between multiple types of goods and services as well as help companies understand how to structure their pricing.